11/27/2012 7:00 PM ET|
Profit from climate catastrophe
The man who predicted the dot-com and housing busts has a new warning out. Here's how investors can act on it.
If you believe climate change is real, and you want to profit from the possible end of the world, you should go out now and buy big energy stocks.
This is the remorseless conclusion of the latest quarterly letter from Boston-based money management guru Jeremy, aka Jeremiah, Grantham.
More on that in a moment.
Grantham's quarterly missives are required reading in the financial world. (They are available for free at the GMO website, though you have to register.) He warned against both the dot-com and housing bubbles before they burst, and on both occasions was among the few voices crying in the wilderness. In recent years he has been warning about the impending disaster of climate change or global warming, with similar success.
Grantham's latest letter, contains astonishing and alarming news. The U.S. economic growth rate is collapsing, he says, and this is not a temporary thing. "The U.S. GDP growth rate that we have become accustomed to for over a hundred years -- in excess of 3% a year -- is not just hiding behind temporary setbacks," he warns. "It is gone forever. Yet most business people (and the Fed) assume that economic growth will recover to its old rates." He says this is a trend that has been developing for several decades. It was masked by the dot-com and housing bubbles, and by a wave of women entering the workforce from 1970 to 2000.
He expects future growth to be about 1% a year after inflation, and warns that rising costs of scarce raw materials -- energy, metals and foodstuffs -- may strangle even that. Grantham fears growth might turn negative, and stay there, within about one to three decades. We will enter a very different world -- one in which effectively everything is recycled.
We forget that productivity growth is a new thing: It was virtually nonexistent in human history until about 1850. It may get back there again.
But what about oil stocks?
Grantham notes that the evidence of global warming is now inescapable. We've had three bad harvests in a row. Of the 10 extreme floods to have hit New York City since 1920, three have occurred in the last two and a half years. Arctic ice has lost 75% of its volume in thirty years. It may all be gone within a decade, Grantham notes.
And now for that math.
Manmade emissions of greenhouse gases since 1850 have raised global temperatures by about 0.8 degrees Celsius, notes Grantham. Once that number hits 2 degrees, we're in deep trouble on global warming.
How much greenhouse gas would we have to emit to hit 2 degrees? Grantham says science allows us to calculate the figure at 565 gigatons.
Yet the proven underground energy reserves of the oil, gas and coal industries, if used up, would emit 2,800 gigatons, or five times that level.
So if the oil, gas and coal industries use up more than one fifth of their proven energy reserves -- even ignoring further discoveries -- we're into the red zone.
And here's the kicker. "We know that to be even a little safe we need 80% of these proven reserves to be left in the ground," writes Grantham. Yet "the market value of oil companies is about equal to the perceived value of their reserves."
The chance these companies would ever willingly agree to keep 80% of their reserves underground, as Grantham notes, is minimal.
No one is likely to force them to, either. According to the Center for Responsive Politics, oil and gas companies alone gave $59 million in campaign contributions in the last year, and spent an additional $149 million on lobbying. They employ 795 lobbyists. (Who says all the good jobs have gone to China?) And that doesn't count propaganda. Just think of those commercials on TV, funded by coal companies, in favor of "clean coal" -- an oxymoron and a phrase Grantham says is worthy of Hitler's minister of propaganda, Joseph Goebbels.
Grantham's conclusion, to summarize a little, is that we are all in deep trouble because the energy companies would never agree to rein in their profits for the good of the planet.
The cynical might add: People are most in trouble if they (a) have children and (b) don't own energy stocks to cover their own rears. After all, those companies will own a valuable, vanishing resource in a world they dominate politically.
The simplest way to buy them is through the iShares S&P Global Energy (IXC) exchange-traded fund, which owns a basket of top U.S. and foreign energy stocks.
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